Professional Documents
Culture Documents
2014
Issue 3Page 1
Dec. 2014
EVALUATION
EVALUATION:
Investing Insights brought to you by the students of NYU Stern
LETTER FROM THE EDITORS
Among the many lessons that weve learned from the aftermath
of the 2008-09 global economic crisis is that governments play a
major role in the financial markets. In the last six years, central
banks around the world have injected massive amounts of capital
in order to support and even inflate financial markets. The U.S.
Federal Reserve has injected $3.6 trillion through three rounds of
quantitative easing since 2008. The Bank of Japan recently shocked
the markets by upping its annual purchases of JGBs from 50 to 80
trillion Yen (from $430 to $680 billion). In total, major central
banks have expanded their balance sheets by approximately $6
trillion1 since 2009.
Steven M. Fulop:
Mayor of Jersey City
Page 2
While a rising tide lifts all boats, the last six years have been a
not so subtle reminder that the moon (or government, extending
the analogy) is a major factor controlling the tide. For the third
issue of EVALUATION we elected to focus on two related areas of
the market that are not commonly a part of the business school
vernacular: Public Finance and Infrastructure Investing. These
areas, located at the intersection of the private and public sectors,
give us some insight into the interplay between investing and
government.
It is our pleasure to introduce the third issue of Sterns studentrun investment newsletter, covering a range of topics in the public
finance and infrastructure investing areas, in addition to some
student-submitted investment ideas. We hope that you enjoy and
take away a few new ideas. Finally, we would like to thank our
interviewees for their time and contributions, as this would not be
possible without their valuable insights. With that, happy reading!
Bryce & Ethan
EV Editors
Dec. 2014
EVALUATION
Page 2
Mayor Fulop
Dec. 2014
EVALUATION
Page 3
Dec. 2014
EVALUATION
Page 4
Jersey City is an older city with older infrastructure and its a challenge to find
money in order to continue to invest in the way that we want to. We try to seek out
public/private partnerships in order to leverage private capital for these projects.
order to make sure that theyre investing back in
the community and that the whole city benefits
from it.
EV: Can you talk about a situation where
youre at the negotiating table with some of
these private investors?
SF: Journal Square. Its the first building thats
gone up there in decades. It used to be the heart
of the city. It will be a 70-story building. Theyre
investing in the Loews Theater as well and also
in some infrastructure around the building over
there. That was the better part of the first four
months of our administration, and they broke
ground earlier this year.
On the November 13th, 2014, Moodys
upgraded the credit rating of Jersey City from
Dec. 2014
EVALUATION
Page 5
The best thing I could say is this be willing to take a chance. You dont know where
doors will open and more often than not people are reluctant to walk through them.
layers to bureaucracy in government, which is
challenging and frustrating. Ive had the good
fortune to work with great people in both
sectors. On the public side, often there are
tremendously talented people that arent
appreciated to the degree that they should be.
My career trajectory is hard to tell. If you asked
me 10 years ago if I would have been the Mayor
here I would have told you, no. If you ask me,
10 years from now will I still be in government,
my knee-jerk reaction would probably be,
unlikely. But you never know.
EV: On a personal note, we also understand
that you compete in marathons and longdistance triathlons (including the Ironman
U.S. Championship in 2012). How are you
able to fit the training into your busy
schedule?
SF: Time management. Ill never do an Ironman
again, but last year I did a half Ironman and Ill
Dec. 2014
EVALUATION
Dabo Horsfall
Dabo Horsfall has over 13 years of global Gas &
Power Infrastructure sector work experience.
Prior to joining African Capital Alliance, he
worked at Morgan Stanley Infrastructure Partners
(MSIP), a $4 billion global Infrastructure
investment fund, in New York. At MSIP, Dabo was
an investment executive and he actively managed
several energy infrastructure portfolio companies.
Prior to joining Morgan Stanley, he was an
investment banker at Lehman Brothers (later
Barclays Capital), where he focused on Mergers
and Acquisitions advisory. He began his career as
a Chemical Engineer in Texas. Dabo holds a BSc. in
Chemical Engineering from the University of
Texas, Austin, a Masters in Public Administration
from Columbia University and an MBA from New
York University.
EVALUATION (EV): Mr. Horsfall, thanks for
taking the time to sit down with us. You
started out as a Chemical Engineer. How did
you end up in infrastructure investing?
Dabo Horsfall (DH): I was born and raised in
Nigeria and I came to the USA primarily to figure
out how to develop my country and continent.
My dad wanted me to be a civil engineer, but I
had too much love for chemistry, so I became a
chemical engineer. Naturally, I initially focused
my career on the oil and gas space, which is what
Page 6
Dec. 2014
EVALUATION
Page 7
Dec. 2014
EVALUATION
Page 8
In terms of where you get proper risk adjusted returns today, I think its in
emerging/frontier markets as long as you back the right partner and right
strategy. Theres too much money chasing infrastructure assets in developed
markets; everyones looking for the same thing.
compress/liquefy it, put it in trucks, and get it to
wherever you have your gas grid or directly to
the end users. This was critical learning for what
Im starting to do in Nigeria, given that the gas
infrastructure is largely non-existent. Some of
these pipelines take a long time to build and
construction risks are high in Nigeria. However,
given the alternative cost of power, which is
diesel-based, one can actually compress/liquefy
the gas, put it in trucks, transport it, degasify,
and still produce power at a cheaper cost than
Dec. 2014
EVALUATION
Page 9
Dec. 2014
EVALUATION
Page 10
Dec. 2014
EVALUATION
Aaron Gold
Page 12
Dec. 2014
EVALUATION
Page 13
Dec. 2014
EVALUATION
Page 14
Dec. 2014
EVALUATION
Page 15
Dec. 2014
EVALUATION
Gerard J. Lian
Gerard J. Lian entered the municipal bond
profession in 1982 as an Associate Attorney
with Wood & Dawson, a municipal bond law
firm. He then decided to enter the financial
side of the business by taking a position as
Senior Municipal Bond Analyst with American
Express, and later, became an Executive
Director at Morgan Stanley Investment
Management. In 2010, Mr. Lian joined Invesco
where he presently works as Senior Analyst.
He has served as an Adjunct Faculty member
at the New York University MPA Program at
Wagner School since 2009. Mr. Lian is a
graduate cum laude of Drew University, holds
a J.D. degree from Rutgers Law School,
Camden, N.J. and a M.P.A. degree from the New
York University Robert Wagner School of
Public Service.
EVALUATION (EV): Professor Lian, to get us
started, would you mind talking a bit about
your Topics in Municipal Finance course at
NYU Wagner? What are the major themes
from that class?
Gerard Lian (GL): This is a team-taught course
that Professor Jerrold Abrahams and I have been
teaching for the past six years. The course is
Page 16
designed to equip graduate students with an indepth understanding of the municipal bond
market, combined with a practical
understanding of credit analysis. We try to
capture the excitement and real world relevance
of municipal finance by approaching this
discipline from multiple perspectives. We do
most of the lecturing ourselves but also rely on
prominent guest lecturers to address specialized
subject matter. In general, were striving to blend
theory and practice. For example, we cover a
wide-range of timely issues in municipal finance
that have important public policy significance (ex.
public sector pensions and health care costs). We
also cover project finance (one of our lectures
deals with projects in New York City including
the Hudson Rail Yards and the World Trade
Center rebuild) and public/private partnerships.
There is a heavy emphasis on credit analysis
throughout. Other topics covered include the
fundamentals of municipal bonds and a history
of the growth of U.S. public infrastructure, a
favorite topic of mine; also an overview of
municipal tax credits, municipal derivatives and
alternative energy covered by Professor Jerrold
Abrahams.
EV: Getting to your background, you started
out as an attorney in municipal finance, but
shortly thereafter got into the financial side
at American Express what originally
attracted you to this business?
GL: There were two factors responsible for the
cross over to municipal finance. First, as an
undergraduate at Drew University, Dr. Robert
Smith encouraged Political Science majors
interested in municipal finance to pursue a
combined degree in law and public
administration. So I had a pre-conceived plan to
acquire an MPA degree in Finance even before I
entered law school. Secondly, as a practicing
municipal bond attorney, you quickly recognize
that the catalyst for municipal project
development really resides on the financial side.
Thats what is driving the bus. This made
Dec. 2014
EVALUATION
Page 17
Dec. 2014
EVALUATION
Page 18
Dec. 2014
EVALUATION
Page 19
The lessons learned from recent Chapter 9 filings, particularly with Detroit and to a
lesser extent with Stockton, is that the entire category of special revenue bonds
fares a lot better in Chapter 9 than GO bonds that may not be construed to confer
secured creditor status.
better in Chapter 9 than GO bonds that may not
be construed to confer secured creditor status.
Informed investors, in terms of their investment
strategy, really place a lot of emphasis on
investing in essential service bonds, such as
public power, water and sewer, and toll roads
that collect user fees. There is a special purpose
entity that is set up to charge user fees to recover
the cost of providing that service. Those essential
services are often utilities that are granted an
exclusive service franchise, coupled with the
right to recover costs free from rate regulation.
Consequently, these bonds tend to perform well
under all economic cycles.
Dec. 2014
EVALUATION
Page 20
Any time that the tax-exempt yield is equal to or even in certain instances
exceeds the treasury yield, youre earning a premium. When this ratio is high,
munis, categorically, are attractive.
EV: What type of research are you currently
working on, if any?
GL: What I am researching now is the
importance of public infrastructure to economic
growth. Im studying that relationship a little
more systematically. In my present-day course I
kind of trace the history of some large
infrastructure projects in the United States, the
Erie Canal and the Brooklyn Bridge, for example.
I think theres also a need to draw a relationship
between investment in public infrastructure and
Dec. 2014
EVALUATION
Page 21
Dec. 2014
EVALUATION
Page 22
Dec. 2014
EVALUATION
Page 23
Opportunity:
Motorcycles are underearning: Motorcycles (8% of 2014 sales) are currently losing money because the
company has been investing in sales, marketing, and new capacity (which isn't at scale yet). All the
capacity additions are now complete except for a new paint facility at Spirit Lake, IA. The company says
that motorcycles will breakeven in 2015 and that motorcycle EBIT margins can move to the company
average over time. If that is true, I think motorcycles could drive 160bps of company-level EBIT margin
expansion by 2017. I collected all of the sell-side models and none of the sell-side analysts attempt to
model margins by product. Many buy-side analysts use sell-side models, and they may not be
incorporating motorcycle margin expansion into their valuations.
New Product: Polaris is now shipping Slingshot, a new three-wheeled motorcycle, to 350 dealers in the
U.S. My calls with dealers suggest that pre-orders for the Slingshot have been so strong that Polaris
doesn't have enough product to ship. The company expects to do $300-500M in annual Slingshot sales by
2017-2019, and I expect them to beat that goal. I was at the International Motorcycle Show in NYC on
Dec. 13-14th, and everyone there loved the product. I expect Polaris to announce an automatic version of
Slingshot by 2016.
International expansion: The company plans to get 33% of sales from outside the U.S. and Canada in
2020 (up from 16% in 2013). Currently, products are assembled in the U.S. and shipped to Europe. A new
Poland factory is starting production now and will save $20M/year in shipping costs. A new India factory
starts production in 2Q15.
Underlevered: Polaris has significant debt capacity, and I expect the company to use debt to finance
future bolt-on acquisitions. The companys 1% net debt-to-capital ratio should move toward 10% over
time, which would reduce WACC and create significant shareholder value.
Management: The companys 40.5% ROIC is evidence that management has been a great steward of
capital. The team is willing to admit mistakes, which is very rare. Management exited the personal
watercraft business in 2004 after intense competition from BRP (Sea-Doo).
Thesis:
Polaris (PII) is a high-quality growth stock trading at an attractive price. I expect Slingshot to do $500M
in sales in 2018, and I expect Polariss other motorcycle brands (Indian and Victory) to take an additional
5% of the 1400+ cc heavyweight motorcycle market away from Harley by 2017. I expect new products
and higher margin side-by-side vehicles to drive mid- to high-teens sales growth for the next five years. I
expect EBIT to grow at a 5-year CAGR of 19.5% driven by motorcycle margin expansion, modest
operating leverage, and mix shift toward side-by-side vehicles.
Price Target:
My price target of $193 is based on a DCF valuation using a 5-year EBIT CAGR of 19.5%, WACC of 10%,
and a 3% terminal growth rate. PII trades at 10.3x 2016 EV/EBIT, roughly in-line with powersports peers
(Harley, BRP, and Arctic Cat), but it is a better company with higher growth, higher ROIC, higher EBIT
margins, and lower operating leverage.
Dec. 2014
EVALUATION
Page 24
Billy Duberstein is a first-year MBA student at NYU Stern. Prior to Stern, Billy was a
filmmaker, political researcher, and this past summer was an equity research intern at
Resolve Capital in Los Angeles, a thematic long-short fund specializing in sustainable
investing. He also co-manages his familys investment portfolio across equity, real estate,
private equity, and other alternative asset classes. Billy has a B.A. in Music with a minor in
English from University of Virginia. He can be reached at wzd201@stern.nyu.edu.
Siddharth Dandekar is a first-year MBA student at NYU Stern. Prior to Stern, Sid was an
emerging markets investment banker, assisting large Indian corporates in raising debt
capital. He has completed all three levels of the CFA examination and also manages his
familys investment portfolio across equity, debt, real estate and other alternative asset
classes. Sid has a M.S. in Industrial Engineering from Purdue University and a Bachelors in
Computer Science from the University of Mumbai, India. He can be reached at
dds374@stern.nyu.edu.
Dec. 2014
EVALUATION
Page 25
clients. Last year, tech companies spent almost $13 billion on patent litigation, almost half of which were
legal costs that RPX believes it can take out of this inefficient system. RPXs year-end revenues are
projected to be about $260 million with net income of roughly $42 million. RPXs current average useful
life for its patent portfolio is roughly 47 months, or about four years.
Thesis #1: Size / Age Risk is unwarranted due to subscription model and cash hoard. RPX IPOd in
2011 and is the only business really doing what they do (which we view as a positive). Their business
runs on 3-year subscriptions and RPX has demonstrated a retention rate over 90% while steadily
increasing the number of subscribers every year. This, to us, means RPXs value is being demonstrated to
customers and that there is little risk of large drops in revenue, especially as RPX grows and diversifies its
customer base into different tech verticals. Moreover, RPX has over $300M in cash and no debt (on a
market cap of $708M). While RPX is aiming for just $135M in patent spend this year, the company is
justifying its cash hoard as an advertisement to patent owners that they are open for business and also
perhaps to make large-impact deals to increase their rate card (more on that later).
Thesis #2: Fears of slowing / maturation overblown. RPXs growth has decelerated this year to
roughly 10% as opposed to 28% and 20% in 2012 and 2013 respectively; however, the lull this year is
largely due to a particular group of client companies in the mobile sector experiencing decreased
profitability and M&A. Many of these companies contracts were up for renewal at once and their
subscription fees went down, as RPXs fees are tied either to revenue or profitability of the client
company. This caused the first ever decrease in sequential subscription revenue in Q3 2014, however this
is largely behind the company. RPXs total number of clients has steadily increased to roughly 190 since
inception (RPX estimates that the total universe of companies that may be appropriate for core
subscriptions is roughly 500). Unless you believe the overall profitability of the entire tech sector will
decrease in the future, theres no reason to worry. Facebook didnt exist 10 years ago and the number of
patents issued in the U.S. has doubled in the last 10 years. Current consensus is also completely ignoring
the potential of the new insurance product, which only this year was granted Lloyds A-rated coverholder status, and RPX has yet to scale this new product (it has under 50 insurance clients currently,
though it could be thousands). Moreover, management has intimated that a core subscription price
increase is likely.
Thesis #3: Patent legislation that would fix the NPE problem is unlikely. The likelihood of
significant patent reform severely curtailing the NPE business is low. Patent suits are down ~20% this
year, yet this is still equivalent to 2012 levels, which were up significantly from the mid-2000s, when RPX
was launched. Moreover, management believes that recent rulings against low-quality software patents
affects less than 3% of all the suits in which RPX is involved. In speaking with an experienced patent
lawyer who writes a well-followed blog on patent reform, he said that NPEs are sophisticated players, it
is still a high-margin business, and NPEs should be a viable threat to tech companies going forward.
Moreover, it is difficult to legislate in a way that would curtail NPE litigation without damaging the
legitimate patent rights, which are the bedrock of U.S. law. Finally, there are well-funded players on the
other side of the argument (pharmaceutical industry, universities) and patent reform is unlikely to draw
a lot of voters. If there are two things Republicans like, they are 1) not passing legislation and 2) marketbased solutions (like RPX).
Valuation: In our DCF model, we assume decelerating growth through 2020, 2% terminal growth and a
WACC of 10.32% (includes 100 bps illiquidity premium). We estimate RPX to sign up two fewer clients
annually going forward (vs. 19 this year), average subscription fee to decrease by 1% every year (due to
Dec. 2014
EVALUATION
Page 26
new clients being smaller than current clients, but also conservative, given likely rate hike), and only $3M
incremental annual revenue from new insurance clients. Significantly, we also did not add back stockbased compensation to cash flows (which would have added another $3.88/share to our price target) as
we believe this to be an ongoing expense. Consequently, our DCF fair value estimate of $19.49 is 50%
above the current price of $13.01. Applying RPXs current P/FCF (adj. for stock-based comp) multiple of
18x (which is well below the 27x FCF multiple enjoyed by its patent & technology licensing peers) to our
2015E adj. FCF, we get a price of $17.50 (35% upside). While our base case price target implies a LTM
P/E of 23.6x, assuming flat revenue and decreasing operating margins, and applying the current 15.4x
forward P/E multiple to our 2015E EPS, gives us a bear case valuation of $11.19 (14% downside).
DCF
For the Fiscal Period Ending
Currency
Revenue
EBITDA
EBITDA margin %
EBIT
EBIT * (1-t)
Plus: D&A
Plus: Other Non-cash items
Less: Increase / Decrease in NCA
Less: Capital Expenditure
FCFF
FCFF % of sales
FCFF-share based expense
DCF Valuation
Weighted average cost of capital:
Net present value of free cash flow
Term inal grow th rate
Term inal value
Present value of the terminal value
2014
2015
2016
2017
2018
2019
2020
259.9
187.2
72.0%
72.0
45.4
118.4
14.5
(13.2)
137.0
54.4
21%
39.9
283.5
204.2
72.0%
75.0
47.2
133.0
15.9
(8.2)
134.8
69.5
25%
53.7
304.1
219.1
72.0%
72.5
45.7
151.1
17.0
(6.9)
143.1
77.5
25%
60.5
322.0
231.9
72.0%
78.9
49.7
158.4
18.0
(5.6)
150.0
81.7
25%
63.7
337.1
242.8
72.0%
93.8
59.1
155.2
18.9
(4.3)
155.5
82.0
24%
63.2
349.6
251.9
72.0%
100.3
63.2
158.6
19.6
(3.1)
159.6
84.8
24%
65.3
359.6
259.0
72.0%
102.7
64.7
164.2
20.1
(1.9)
162.3
88.6
25%
68.5
w dilution
10.32%
$344
2.0%
$1,086
$603
10.32%
$266
2.0%
$840
$466
Enterprise value
Less: Net Debt / (Add: Net Cash)
Equity value
Diluted shares:
$947
($345)
$1,292
55.0
$732
($345)
$1,078
55.3
Price Target
$23.49
$19.49
$13.01
81%
$13.01
50%
Key Catalysts
Catalyst #1: RPX still has room to grow its core
business and increase its rates. At 10% of the patent
market currently, RPX has an unmatched data advantage
that it is currently giving away for free to its clients. It
has helped negotiate roughly 20% of their clients
litigation expense with annual fees materially lower
than that figure. We believe there will come a point
where RPX dramatically increases its rate card and can
then buy up a large portion of the overall patent market,
solidifying their status as the clearing house through
which companies clear all patent risk.
Catalyst #2 Insurance takes off: While RPX has less than 50 current insurance clients, the company
estimates that the potential market could be thousands of clients. Moreover, as it stands, RPX is planning
on only taking 30% of the risk and reinsuring the rest (to three different willing reinsurance partners,
which should give an indication about the viability of the product). Since RPX has an unmatched data
advantage and can preemptively buy potential threatening patents before they can strike, RPX may take
on a larger portion of the risk (and therefore larger profits), over time.
Dec. 2014
EVALUATION
Page 27
Prior to attending Stern, Raphael spent four years at Societe Generale, HSBC and
Allianz, specializing on asset-liability management, financial controlling and internal
investment. He most recently interned with VMware focusing on financial investments.
Raphael graduated in 2009 from ISG Business School in Paris with a Master in
Management and a focus in Finance. He passed the three levels of the CFA Curriculum.
Raphael can be reached at raphael.charbit@stern.nyu.edu.
Raphael Charbit
Over the last 20 years, LVMH has experienced revenue growth at a 12% CAGR. Over the past 10 years
its EBITDA margin has ranged from 21% to 28%. During each crisis, LVMH has been able to increase
its market share due to the appeal of classic brands during crisis and the responsiveness of
management to seize opportunities.
The CEO of the company, Bernard Arnaud, together with his family, controls 48% of LVMH shares and
64% of the voting rights. However, the CEO has always been shareholder friendly the Hermes
distribution and a consistent increase of the dividend over time (went from 0.95 Euro to 3.10 Euro
over the last 10 years, or a CAGR of 14%) are two strong examples. Bernard Arnault also has strong
incentives to be shareholder friendly, including preserving his ability to acquire new businesses
through exchange of shares like he did with the Bulgari family in 2011 (luxury companies have tax
bases close to zero so as an acquirer it is beneficial to have stock to offer as opposed to cash).
Dec. 2014
EVALUATION
Page 28
Due to its complexity, many sell side analysts do not fully appreciate the underlying value across all of
LVMH. For example, some consider that it is an underperforming company because its ROE is lower
than that of Prada or Hermes without considering the amount of equity invested or investigating the
cause such as the consolidation methods.
Opportunity:
LVMH (revenue TTM EUR29.5B, EV/EBIT TTM 13.2x, enterprise value EUR 77.8B) is an excellent
company and the leader in an appealing industry. It is currently trading at an attractive price. LVMH is
able to generate considerable free cash flows while fueling strong growth. LVMHs maisons comprise
many successful businesses including Louis Vuitton the biggest cash generator among Fashion brands.
Valuation:
Sum-of-the-parts: LVMH is expected to deliver higher growth than its peers but is trading at a 26%
discount comparatively. To prepare the sum of the parts, I used multiple peers specific to each business
and I adjusted the multiple based on characteristics of those companies (including growth, margins, and
risk) versus the ones of LVMHs businesses (using linear regressions among other tools).
Dec. 2014
EVALUATION
Page 29
governance. Finally, LVMH has a history of shareholder friendly actions (mostly raising dividends) and
the incentive to be friendly is more important today.
Why is the ROIC of LVMH lower than many peers (15% vs. peer average of 19%)? Isnt this a sign
of an inferior company?
The headline ROIC of LVMH (12%) has often been computed by simply adding the equity, the debt, and
subtracting the cash, but without subtracting the fair value of Hermes shares that is not an operating
asset and therefore brings in no operating income Hermes shares are accounted as AFS and therefore
impact the equity.
A lower ROIC does not mean that LVMH is inferior. Firstly, LVMH has deployed the most capital (27
billion euros) in this sector with a ROIC of 15%, well above the cost of capital. Secondly, a large part of
the accounting assets come from acquisitions: goodwill and intangibles account for 21 billion euros the
average CROIC of all the LVMHs businesses a better base to compare - is 70% which is more than
almost any company in the sector.
So what is the market missing?
The market focuses on Louis Vuitton and probably does not like the complexity of LVMH.
The Wines and Spirits division is overlooked while LVMH controls almost 20% of the land of
Champagne through ownership and long-term contracts and while LVMH possesses, among other
things, 216 million bottles of premium wines and champagne aging.
The ROIC is poorly computed and poorly understood.
The possible flotation of Marc Jacobs and the value of the art collection are ignored.
Catalysts:
The Hermes distribution is an excellent catalyst: it releases value to the investor while LVMH is
undervalued, it simplifies the company, and it will also improve the headline ROIC.
LVMH is also preparing the flotation of Marc Jacobs shares. While there is no date set, it may
happen within the next year. The effect would be to release value to shareholders from the
discounted LVMH. Considering the market appetite for Michael Kors and the strong growth of
Marc Jacobs, the timing may add additional value to LVMH shareholders. Finally, the remaining
brands of LVMH will be more focused towards real luxury and the market may reward this
refocusing.
Dec. 2014
EVALUATION
Page 30
Troy Green is a second year MBA at NYU stern. This past summer Troy worked at Claar
Advisors LLC, a long/short value+catalyst, event driven hedge fund. Prior to Stern, he
founded Green Oak Investments a long/short equity fund. Troy managed the portfolio of
Green Oak for 6 years earning an average annual return of 24%. He holds a BS in
Electrical Engineering from Virginia Tech, and he can be reached at
troy.green@stern.nyu.edu.
Troy Green
Dec. 2014
EVALUATION
Page 31
Division
Mean
Multiple
#
of
Comps
Sporting
6.4x
Defense
8.2x
Aerospace
8.3x
10
Dec. 2014
EVALUATION
Page 32
projections. Overall, I understand the long-term benefits of the ATK-ORB merger, but in doing my
analysis I found my short thesis overwhelmingly compelling. I find that I would rather pick up a knife on
the floor than catch it while its falling.
Investment Risks:
A sudden and unforeseen increase in DOD spending for war or increased terrorist activity could
catalyze ATKs defense segments revenues to increase dramatically.
A quick rebound in ammunition consumption combined with market share gains in the sporting
business
No further market response to declining sporting & defense segments
Hard Short Catalysts
The realization of negative leading indicators from the expected lagging data of consumer ammo
consumption and firearm usage
Future bad quarterly performance. Sporting and Defense segments make up over 70% of revenues
and EBIT, and a deeper decline in either of these already declining industries will drive down ATKs
valuation
A slowdown in NASA spending and international growth. NASA spending has declined as a % of
the federal budget consistently since 1991, and 5 yr. forward projections show flat 0%-1% growth
Macro: 53% of revenues concentrated on a tapering US Gov. spending budget. Future
announcements of government defense spending cuts could catalyze price drops
Future launch failures from ORB, or negative news concerning a slowdown in new or existing
contracts
Forward Revenue/EBIT drivers
These estimates show my projections and drivers
for revenue and EBITDA, and this is where I differ
from the street consensus. I also utilized these
estimates in my SOTP valuation. I show a 6%
drop in the sporting segment due to the points
articulated above, and optimistically rebounding
back to the 5% average CAGR by 2017. In
addition, I have margins shrinking to 13%
because competitors have started price-cutting
and reducing inventory levels via sales. Although
Bushnell and other legacy brands maintain a
strong market share, ultimately their products are
commodities, so there will be margin pressure in
future years. I projected aerospace to be the
strongest division due to international growth,
and the strong clarity in future earnings due to
continuing contracts with Boeing, and other
internationals. I held defense growth at a modest
3% with margins decreasing 30 bps then ramping
back up to 10.5%.
Dec. 2014
EVALUATION
Page 33
Owens Huang received his B.Sc. in Chemistry from National Taiwan University in 2006.
Prior to attending Stern, Owens worked as an investment commissioner at Taiwan
Insurance Guaranty Fund, managing the $10 billion portfolio of an insolvent life
insurance company. While at Stern, he won the Fortress Challenge, a national portfolio
management competition sponsored by Fortress Investment Group. He generated an
alpha of 20% and Sharpe ratio of 2.5% over the six-month period, investing in U.S. stocks
with a long-short strategy. Owens can be reached at owens.huang@stern.nyu.edu.
Owens Huang
Dec. 2014
EVALUATION
Page 34
Fiscal Deficit:
The Government of India expects the budget deficit to decrease to 4.1% in FY 2015. I believe the Modi
government is able to achieve this goal, as the new government would lower both interest payments and
subsidies for food, fuel and fertilizer as inflation declines. Interest payments account for 3.4% of GDP in
FY 2014 and subsidies account for 2.3% of GDP. As inflation decreases, all these burdens will decline as
well. Moreover, the Government plans to divest many state-own companies and projects. The Ministry of
Finance even has a Department of Disinvestment 1 to execute the process. This certainly will rebuild the
government budget to a healthier position.
Inflation:
The worst of inflation has passed. Based on the forecast of the
Reserve Bank of India, inflation will go down sharply to 8% in
the second half of 2014, compared to 10% in 2013. Due to the
cheaper global oil price, I believe the inflation will go even lower.
Historically, the wholesale price index (WPI) has been the
central measure of inflation in India. However, the RBI
announced in 2013 that they would start to use the consumer
price index (CPI). This change will make the inflation index less
volatile.
The composition of CPI includes 34% for Food, mostly cereals
and products. I checked the grain stocks with the Food
Corporation of India (FCI): the numbers show that current rice
and wheat inventory are at 55mn tons: the record high is close to
60mn tons (2013). The inflation rate during last summer was
7.96%, and remained at higher levels due to a steep rise in
vegetable prices. However, this problem is dissipating due to the
late rainfall in August. With the disappearance of drought as a
concern, I believe the food inflation problems have been cooling
down.
Conclusion:
As the price of oil is trading lower, India will be the biggest
winner. $10/bbl decline in Brent oil price will increase India GDP
growth by 0.2% and decrease inflation rate by 0.4%. Moreover,
current account deficit would decline 0.4% and fiscal deficit
0.2%.2
The trend of Rupee depreciation is reversing due to lower
budget and current account deficits, coupled with lower
inflation. The Modi government is expected to reaccelerate
Indias economy with a business-orientated management; lower
oil price would be a great catalyst in near term. In the coming
years, buying the Rupee and selling the Japanese Yen or Euro
will be one of the most popular carry trades.
1 http://www.divest.nic.in
2 Source: Goldman Sachs
Dec. 2014
EVALUATION
Page 35
Ethan C. Ellison
ece252@stern.nyu.edu